Friday, February 16, 2007

The Spaniards are coming, the Spaniards are coming -- and they want your deposits.

Spain's two main retail banks have moved from the bush leagues to become among the largest, most efficient, most profitable in the world. And one of them just made a big play to take on two U.S. giants in a lucrative American market.

Banco Bilbao Vizcaya Argentaria SA's agreement to buy Alabama-based Compass Bancshares Inc. for $9.6 billion, announced Friday, would give it hundreds of branches in the South and West, including 163 in Texas, a fast-growing market. That would pit Madrid-based BBVA against Bank of America Corp. and J.P. Morgan Chase & Co., the Lone Star State's two biggest banks.

That deal follows Spain-based Banco Santander Central Hispano SA's acquisition last year of a 25% stake in Philadelphia-based Sovereign Bancorp, which has almost 800 branches in nine states.

BBVA was all bluster in announcing the deal. BBVA "is much more advanced than the Citis or the J.P. Morgans" at nuts-and-bolts retail banking, said Chairman and Chief Executive Francisco González.

The U.S. rivals are expected to put up a fight. "They're competing against some of our best retail banks," said Jefferson L. Harralson, a bank analyst at Keefe, Bruyette & Woods. "It's going to be hard for them to move market share, and it's going to be hard for them keep market share."

The deal follows a string of acquisitions that have turned BBVA and Santander into the world's 15th-largest and ninth-largest banks respectively by stock-market value. Both reported record full-year profits this month.

Santander increased its assets eightfold over the past decade, thanks to massive expansion in Latin America and the United Kingdom. Despite the growth, the bank has boosted its return on equity, a key profitability measure, to about 21%, up from about 14% in 1996. BBVA is slightly smaller but even more profitable, with a return on equity of about 24%. On that score, both Spanish banks outperform Citigroup Inc., Bank of America and HSBC Holdings PLC, the big British bank.

Shares in BBVA and Santander have trailed their more sedate peers because the market expects them to keep making pricey acquisitions. The Compass deal sent BBVA's stock on Friday down 2.4% in Madrid and its American depositary shares down 2.5% on the New York Stock Exchange. Compass shares rallied 6.5% on the Nasdaq Stock Market (see chart on page B3).

The Compass purchase was BBVA's biggest ever, and Mr. González says he wants it to be one of the world's biggest banks by the end of 2008. Santander swore off acquisitions after the Sovereign deal, but it stoked deal fears anew this month by taking a 2% stake in Capitalia SpA, Italy's No. 3 lender.

The Spanish banks' efficiency stems from stiff home-market competition. To survive, they overhauled their businesses. Both invested heavily in new computer systems in the early 1990s that are just now being fully implemented. The new systems offer advantages over the traditional databases that scatter information on customers into various business "silos."

That helps BBVA and Santander sell more products to each customer than European and U.S. peers. BBVA sells almost five products to each customer, compared with about three products per customer at Compass.

As a result, for every €100, or about $130, of income, BBVA and Santander spend €43 and €48, respectively -- compared with €50 at HSBC and €55 for Compass, considered one of the Sunbelt's best-run banks. Both banks also have invested heavily in other areas, especially risk management. Both have impressive nonperforming-loan rates of less than 1%, even including their Latin American operations.

BBVA is using its computer system to change banking in Mexico, where it has attracted four million customers in the past two years. Recovering from the economic shocks of the 1990s, banking services there are trickling down to the broader population. BBVA has two million low-income "virtual" Mexican customers who deposit paychecks and spend money via credit accounts. Maintenance costs for such accounts are low, widening profit margins.

The bank originally entered the U.S. with acquisitions of Valley Bank, Laredo National Bancshares and Texas National Bancshares over the past two years, hoping to funnel money from Mexican immigrants in the U.S. to relatives' BBVA accounts in Mexico.

Now Mr. González wants to expand to more affluent American customers in Texas. The state has no major hometown player, making it one of the most competitive markets in the country. Several banks are buying and building branches there, including Capital One Financial Corp., of McLean, Va.; Wachovia Corp., of Charlotte, N.C.; and Washington Mutual Inc., of Seattle.

BBVA has taken on considerable risk with the Compass deal, which was put together by BBVA's advisers at Morgan Stanley, its lawyers at Cleary Gottlieb Steen & Hamilton LLP, Compass's advisers at Sandler O'Neill & Partners, and its lawyers at Balch & Bingham and Wachtell, Lipton, Rosen & Katz. The deal increases BBVA's exposure to dollar earnings, which could fall against the euro, the bank's home currency. Mr. González says it is a long-term play.

"If we can successfully introduce our model there, we will have reached an enormous milestone," he says.

--Valerie Bauerlein in Atlanta and Carrick Mollenkamp in London contributed to this article.